As the spring selling season moves into full bloom, the housing market seems to be getting an important lift from outside economic sources that could produce a sustained housing recovery. The question is whether they are strong enough to overcome a continued drag from falling home prices and record-high foreclosures.
The first piece of good news is the stock market. During the last year, the Dow Jones Industrial Average and the S&P 500 are up 20 percent to 23 percent respectively, though political turmoil in the Middle East threatens to erase some gains. By mid-February, the market had nearly recovered to levels last seen three years ago.
Stock equity gains fueled an almost $7 trillion increase in household net worth through the 18 months that ended last year. That kind of windfall can provide a serious boost to “animal spirits,” the term economist Robert Shiller famously used to describe swings in consumption.
Households, which squirreled away what they could during the downturn to pay down debt, seem to have reopened their wallets. In the fourth quarter of last year, consumer spending on durable goods—such as cars, windows, and refrigerators—rose at an incredible 21.6 percent rate, according to the Bureau of Economic Analysis. Even investment in residential real estate made a big turnaround in the last three months of the year, rising by 3.4 percent, after a decrease of 27.3 percent the previous quarter.
The seeming new willingness to spend money on the home corresponds, not surprisingly, with growing confidence about job security. Though unemployment remains troublingly high, recent job growth takes pressure off people who worried that they might lose their jobs. They can think seriously again about home improvements or moving to a new home.
In one of the clearest indications of a pendulum shift, consumer sentiment, as measured by the University of Michigan, turned positive in February for the first time in years. Even the index of whether consumers think it’s a good time to buy big-ticket items such as cars rose to levels not seen in three years. New homes can’t be far behind.
Not coincidentally, many builders reported that shopper traffic picked up noticeably in January and early February. Active adult builders in particular witnessed a sharp increase in activity. These discretionary buyers may have finally decided it’s a good time to make a move—at the bottom of the market. Also, about half of active adult sales tend to be in cash; selling stock can produce that cash. Local news reports indicate that cash sales are on the rise in select markets throughout the country.
A small rise in mortgage rates—they rose above 5 percent last month, then settled back down—may help rather than harm the market in the short term. The threat of more expensive financing may be enough to get potential buyers, who have delayed a purchase, down off the fence before rates rise any higher.
The same dynamic may play out in home prices this year. Though the consensus is that nationally home prices may fall by at least another 5 percent in 2011, that won’t be true in the healthiest markets—places such as Washington, D.C., and San Diego—where prices appear to have stabilized. Many aggressive buyers may want to lock in deals before they disappear.
The home building industry certainly faces its share of gales this spring, especially from a double-dip in home values and a persistent foreclosure inventory overhang. Also, the headlines for housing sales and permits in coming months may be misleading. That’s because new-home metrics will be compared to last year’s tax-credit-induced levels. Reporting may mask the improved structural bearings of the housing market.
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Learn more about markets featured in this article: Ann Arbor, MI.